Construction projects inherently face the dangers of defective, incomplete or untimely work. In some cases, construction projects are abandoned altogether. Attorney Brian Comarda of Houston, Texas, explains that losses stemming from the occurrence of these circumstances, can be simple to quantify and characterise – such as the cost to resupply a defective part – or they can be quite complicated – such as damages resulting from delay, disruption and acceleration of the work. Damages in the construction context are characterised by courts as either ‘direct’ or ‘consequential.’ Often times, entitlement to or liability for those damages is determined by the terms of the construction contract, which commonly include waivers of any consequential or incidental damages incurred by the parties to the contract. US Courts have traditionally upheld these waiver provisions and relied on them in determining what damages may be recovered by an owner or contractor.

NO TWO COURTS THINK ALIKE

While most courts recognise, or at least cite to, the following cornerstone principles governing the distinction between direct and consequential damages, although defining consequential damages is still a moving target. Simply put, no two courts view consequential damages alike, as demonstrated by several recent rulings from around the United States. This is likely due to the fact that an award of consequential damages depends upon foreseeability of the harm, a somewhat malleable concept.

FORESEEABILITY – THE TEST FOR RECOVERY

In determining whether particular damages are recoverable, courts generally start by establishing the distinction between ‘direct’ and ‘consequential’ damages:

Direct damages are those which arise ‘naturally’ or ‘ordinarily’ from a breach of contract; they are damages which, in the ordinary course of human experience, can be expected to result from a breach. Consequential damages are those which arise from the intervention of ‘special circumstances’ not ordinarily predictable. If damages are determined to be direct, they are compensable. If damages are determined to be consequential, they are compensable only if it is determined that the special circumstances were within the ‘contemplation’ of both contracting parties (and the contract does not expressly exclude them). Roanoke Hospital Ass’n v Doyle & Russell, Inc., 214 S.E.2d 155 (Va. 1975).

Put another way, the difference between ‘ d i r e c t ’ a n d ‘ c o n s e q u e n t i a l ’ damages is “the degree to which the damages are a foreseeable (that is, are highly probable) consequence of a breach.” Rexnord Corp. v DeWolff Boberg & Assocs., Inc., 286 F.3d 1001  (7th Cir. 2002). Ultimately, the golden rule is that the award of consequential damages is limited to those damages which are foreseeable at the time of contracting. Hadley vBaxendale, 156 Eng. Rep. 145 (1854).

DETERMINING WHAT DAMAGES ARE FORESEEABLE
The following factors are typically  considered in assessing the foresee ability of damages in modern breach of construction contract cases: (1) the construction experience of the parties; (2) general knowledge of construction sequences and procedures; and (3) general knowledge of the likely impacts of seasonable changes upon the particular construction processes, see ... Bruner & O’Conner on Construction Law, § 19:19 (discussing Spang Indus., Inc., Ft. Pitt Bridge Div. v Aetna Cas. & Sur. Co., 512 F.2d 365 (2d Cir. 1975)). Utilising these factors, several courts have recently considered the limits of foreseeability for the purpose of evaluating consequential damages claims.

For example, two courts have recently upheld awards of consequential damages, finding the losses foreseeable to the parties at the time of contracting. In Berkel & Company Contractors, Inc. v Palm & Associates, Inc., 814 N.E.2d 649 (Ind. Ct. App. 2004), the Court affirmed an award of c o n s e q u e n t i a l damages for lost profits to a surveyor who was wrongfully terminated from a job by the general contractor. The Court upheld the award because both parties “foresaw that this was a lucrative contract” and could have reasonably foreseen that the loss of the job in question would result in economic loss to the surveyor. Additionally, in Floor Express, Inc. v Daly, 158 P.3d 619 (Wash. App. Div. 2 2007), the Court held that, where a subcontractor breached its agreement with the general contractor by failing to properly perform the subcontracted work as called for in the subcontract agreement, the general contractor’s legal liability to the owner was a recoverable consequential damage of the subcontractor’s breach. The Court believed the subcontractor could have reasonably foreseen that the owner would hold the general contractor responsible for correcting the defective work of a contractor. However, in EBWS, LLC v Britley Corp., 928 A.2d 497 (Vt. 2007), the Court reversed an award of consequential damages for expenses incurred by an owner of a creamery on the ground that they were not foreseeable; the expenses resulted from a three week suspension of operations at the creamery while faulty work performed by a contractor was repaired. The Court noted that the owners were not, at the time of contracting, contractuallyobligated to incur the expenses, which consisted of wages paid to standby workers and purchased milk that ultimately went to waste.

Accordingly, the court denied recovery of these consequential damages, holding that parties are not presumed to know the condition of each other’s affairs or to take into account contracts with third parties that are not communicated.

TENNESSEE GAS PIPELINE COMPANY V. TECHNIP USA CORPORATION
A recent Texas case also offers insight into how courts may view different types of alleged consequential damges, including claims for delay costs, lost profits, loss of efficiency and use of money. Tennessee Gas Pipeline Company (“TGP”) engaged
Technip USA Corporation (“Technip”) to construct improvements along an interstate gas pipeline owned by TGP pursuant to a “Lump Sum Turnkey, Engineering, Procurement and Construction Contract” (“Contract”). During the course of the Project, numerous delays occurred that each partyattributed to various causes – including issues with the components being installed, issues involving the new technology or new applications of technology being employed, delays in change orders, shortages of skilled labour, and inclement weather. Ultimately, the project was completed with up to twenty months of delay. TGP thereafter sued Technip to recoup its additional expenses and for allegedly defective work. Technip file a counterclaim to recover certain sums it alleged to be owed under the Contract. A jury found that Technip had breached the Contract and awarded delay damages and defective work damages  to TGP. Subsequently, on the motion of Technip, the trial court limited the jury award to certain defective work damages. Both TGP and Technip appealed, though Technip’s appeal is beyond the scope of this article. The Court of Appeal entertained the issue of whether TGP’s damages were direct or consequential, and if consequential, whether those damages would be barred by the waiver of consequential damages provision contained in the contract.

The Court referenced the cornerstone definitions of consequential and direct damages, and also held that a general measure of damages is subject to any agreement that the parties might have made with respect to damages because parties to a contract are free to limit or modify the remedies available in the event of a breach of the contract. In this case, the Contract, Article 19.1, reflected that TGP and Technip agreed to limit the remedies available in the event of a breach:

Consequential Damages: Notwithstanding any other provisions of this Agreement to the contrary, in no event shall Owner or  Contractor be liable to each other for any indirect, special, incidental or consequential loss or damage including, but not limited to, loss of profits or revenue, loss of opportunity or
use incurred by either Party to the other, or like items of loss or damage; and each Party hereby releases the other Party therefrom.

TGP contended that its claims constituted ‘direct damages’ and therefore, were not precluded by Article 19.1. Technip contended that all of TGP’s claims were for incidental, indirect and consequential damages and were thus barred by Article 19.1. As an overall matter, the Court of Appeal concluded that Article 19.1 did not preclude recovery for any and all liability for delay that might occurunder the Contract. It concluded that the waiver of consequential damages did not preclude direct damages involving loss of use, opportunity, or profits.
 

The Court next considered whether the specific claims at issue constituted consequential damages, which were waived by Article 19.1 of the Contract. The Court concluded that: TGP was not precluded from recovering ‘project delay costs’ for extended expenses including, labour, travel, environmental contractors, TGP inspectors, purchase and supply of additional construction consumables, hauling wastewater from the site, and utilities, as TGP was expressly responsible for these costs under the Contract. The Court found it could be conclusively presumed to have been foreseen or contemplated by Technip that, as a consequence of its breach of the Contract by delay, TGP would have to continue paying these ongoing costs. Thus, these costs were not precluded from recovery. TGP was not precluded from
recovering costs for providing extended power at a specific station separately from its ‘project delay costs’ above, because the Court concluded in its analysis of the ‘project delay costs [above],’ that TGP was expressly responsible for providing that power under the Contract. It could, therefore, be conclusively presumed to have been foreseen or contemplated by Technip that, as a consequence of its breach of the Contract by delay, TGP would have to continue paying those ongoing costs. The Court concluded that those damages resulting from the delay also represented ‘direct damages’ because they clearly flowed naturally and necessarily from the breach.

TGP was precluded from recovering costs for loss of efficiency – excess gas, oil, and labour that were incurred because a new compressor component was not timely installed – because those claims constituted claims of consequential ‘loss of use’ damages that were precluded under Article 19.1. TGP was also precluded from recovering damages for the costs of a backup generator that it had rented due to a power outagebecause the necessity of a rented backup generator could not have been “conclusively presumed to have been foreseen or contemplated” by Technip at the time the Contract was formed “as a consequence of [its] breach of contract or wrongful act.”

TGP was further precluded from recovering damages for the lost use of money that it had invested in the project, as those funds represented an indirect loss to TGP because any return that might be attributable to theoretical investments TGP might have made fell outside its Contract with Technip.

TGP was precluded from recovering damages for ‘premature energy costs at Station 54’ – essentially the cost paid to the utility company to install and maintain high power transmission lines to the station.

Finally TGP was precluded from recovering costs as a result of activities that required the release of gas into the atmosphere resulting from Technip’s breach. TGP contended that the released gas would have been sold to customers; therefore, the Appeal Court construed TGP’s claim to be for lost profits. The Court held that TGP’s expectation of profit through the sale of gas to its customers was incidental and  consequential to the performance of the Contract concerning the installation of new equipment, and thus were barred by Article 19.1.

In summary, the Court concluded that all of TGP’s damages challenged by Technip as consequential were precluded under the terms of the Contract, as a matter of law, except those damages awarded for ‘Project delay costs’ and for extended power requirements at a specific station.

CONCLUSION

In the USA, and many other legal jurisdictions, a party’s entitlement to consequential damages depends largely on the foreseeability of the alleged loss claimed. Courts will not award damages that are remote and unexpected. Furthermore, courts in the USA will respect contractual provisions waiving a party’s right to recover consequential damages.

Accordingly, these provisions should be carefully drafted to precisely define the types of damages prohibited from recovery – whether foreseeable or not.

** LeBlanc Bland is a law firm specialising in construction advice
 and litigation involving the marine, energy and government sectors. Brian Comarda is a Partner at their Houston, Texas office.
(tel: +1 713 621 7100, email: bcomarda@leblancbland.com .)